Financed emissions 700 times more than banks' direct emissions

London

IT'S through their loan books and investment portfolios that banks and asset managers make their biggest contribution to climate change.

The greenhouse gas emissions associated with financial institutions' investing, lending and underwriting activities are more than 700 times higher, on average, than their direct emissions, according to a report published on Wednesday by climate nonprofit CDP.

While banks generate emissions from heating their buildings and flying executives to meetings - when pandemic restrictions allow - "almost all climate-related impacts and risks of global financial institutions come from financing the wider economy", CDP said in a statement.

Wall Street dollars can either be an enabler for polluting industries, providing the world's biggest emitters with funding for extraction and drilling, or a powerful lever used to push companies to cut emissions and prepare for a low-carbon future. Several major banks, including Bank of America Corp, Barclays Plc and Morgan Stanley, have committed in the past year to measuring and reporting the carbon emissions resulting from their lending and investments.

"The financial services sector is critical to achieving a net-zero carbon future," Emily Kreps, global director of capital markets at CDP, said in the statement. "The real economy transition will require a massive amount of capital directed at decarbonising the economy and enhancing resilience, which only the finance sector can facilitate and provide."

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CDP said its report is the first-ever analysis of so-called financed emissions, which are the indirect, or so-called scope 3, emissions generated from lending and investing. The nonprofit analysed the financed emissions of 322 financial institutions with US$109 trillion of assets, using data that asset managers, asset owners, insurers and banks had reported themselves to CDP.

The results were striking yet incomplete. Only 25 per cent of the companies reported financed emissions, and among those that did, most reported on less than 50 per cent of their portfolios, thereby obscuring the true impact of their financing activities.

Reported financed emissions totalled 1.04 gigatons of CO2, or about 3 per cent of global emissions in 2020. The true figure is likely significantly higher.

Many banks and asset managers are underestimating climate-related risks, CDP said. While 41 per cent of firms said they identify direct operational climate-related risks, such as physical damage to their operations, 65 per cent don't report climate credit risks, such as borrowers' defaults on loan repayments. Meanwhile, 74 per cent don't identify market risks, including stranded assets and financial asset price devaluation, as the economy transitions to net zero.

Financial firms face growing scrutiny about their contribution to climate change, as environmental activists, shareholders and regulators better understand their role as enablers of the high-carbon economy. Banks have offered more than US$3.8 trillion of fossil-fuel financing since the signing of the Paris Agreement, according to Rainforest Action Network, which used data from Bloomberg LP, the parent of Bloomberg News, for its calculations.

Mobilising financial markets to support the transition away from fossil fuels was among the key goals of the 2015 Paris climate accord, and expectations are growing ahead of the follow-up climate summit scheduled for later this year in Glasgow. BLOOMBERG